Issues related to Farm Subsidies in India

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Relevance: GS3: Issues related to direct and indirect farm subsidies and MSP.

Farm Subsidies 

A subsidy is a benefit given to an individual or an institution by the government. Hence farm subsidy is a governmental subsidy paid to farmers to supplement farmer's income and enhance their productivity.

On the basis of the subsidy provided, farm subsidies can be categorized into direct and indirect subsidies. In this article let us first understand the need for such subsidies and then understand what is direct and indirect subsidies and the issues associated with them.

Need for farm subsidies:

  • Article 48 of the Indian Constitution, the responsibility of the state to organize agriculture on modern lines. 
  • As per FAO, 70% of Indian rural households primarily dependent on agriculture for their livelihood.
  • Subsidies are one of the tools for income distribution and to reduce inequalities(Oxfam report 2020- top 10% holds 72% of wealth).
  • Poor income realization to farmers(farmers income is less than 1/3rd income of non-farmers) 
  • Farm subsidies act as a complementary income to farmers, which can be invested back in agriculture.
  • Farm subsidies  Access to quality inputs such as seeds, fertilizers   Increase in productivity   Better income to farmers.
  • Farm subsidies in a way motivate farmers to continue farming as an occupation.
  • Insulate farmers from the issues posed by the covid-19 pandemic.
Direct Farm Subsidies

Direct farm subsidies are those subsidies that are directly provided to farmers and are generally paid in the form of a direct cash subsidy. That is in direct subsidies the beneficiary purchases the product at the same price and the beneficiary is separately compensated for the purchase.
Examples of direct farm subsidies: PM Kisan Scheme, PAHAL in LPG, Farm Loan Waivers.

Advantages of Direct Farm Subsidies:

  • Direct Subsidies help in increasing the purchasing capacity of farmers and to raise the standard of living of the people.
  • Direct cash transfers government empowering citizens and gives choice to beneficiaries to purchase as per needs.
  • It also helps to prevent the misuse of public funds as money is reached beneficiaries directly.
  • Direct subsidies also curb the inefficient use of resources. Ex: As farmers will purchase fertilizer at full rate will purchase what needed.
  • The cash farmers receive can be used as capital in agriculture.
  • Reduces government burden freeing transportation and storage costs.

Issues of Direct Farm Subsidies:

  • Lack of Financial Inclusion in rural areas, poor accessibility of ATM and banking service.
  • The chance that farmers can use the money for non-farm unproductive needs.
  • More money in the hands of the public may lead to inflation.
  • May have an impact on the food security of the country.
  • Main issues like market reforms and innovation in agriculture remained unaddressed.
  • Issues with the identification of beneficiaries.
Indirect Farm Subsidies

Indirect subsidies are those subsidies in which the cost of the product is set at a lower price than the market price. India spends roughly 2% of GDP on indirect subsidies.
Examples: Irrigation subsidy, Power subsidy, Fertilizer subsidy, Credit subsidy, MSP(Minimum Support Price), etc.

Advantages of indirect subsidies:

  • These play a key role in promoting technological and infrastructural advancements in agriculture. Ex: Infrastructural subsidies.
  • Subsidies on Seed and Fertilizer ensure farmers get quality inputs which help to increase the productivity of the farm.
  • Helps to change the behaviour and promote farmers towards sustainable practices like crop diversification.
  • Farmer training also come under Indirect subsidies which make farmer equipped with knowledge.
  • Ensures food security in the country.
  • Help to contain the migration from the agriculture sector to other sectors.

Issues/Challenges of indirect farm subsidies:

  • Subsidies like MSP has led to cereal centric agriculture with distorted cropping patterns.
  • Providing subsidies in power, irrigation, and fertilizer subsidies have led to over usage of natural resources resulting in desertification. Ex: Punjab's groundwater resources note that groundwater extraction has increased from 149% in 2013 to 165% in 2018
  • Indirect subsidies are marred with corruption and leakages, due to intermediataries. Ex: PDS where the presence of ghost beneficiaries, leakages are observed. 
  • Pressure from the international community to reduce subsidies as per WTO subsidies that distort the market come under the Amber box.
  • Vote bank politics, the government in power can provide subsidies for mear political mileage.

WTO Subsidies catregorisation:

  1. Export subsidies Ex. export credit is given to farmers by countries like China 
  2. Subsidies contingent upon the use of domestic over imported goods Ex. Countries like the USA where in order to ensure guaranteed return procure from farmers which indirectly benefits consumers with lower prices.
  3. Industrial promotion subsidies ExNew UK farming bill guarantees subsidies for 2020 to promote agri-industry in the event of Brexit.
  4. Structural adjustment subsidies Ex: Schemes like PM Krishi Sanchai Yojana to promote irrigation in the agriculture
  5. Regional development subsidies.
  6. Research and development subsidies.

 WTO Agreement On Agriculture(AOA): AOA is aimed to remove trade barriers and to promote transparent market access and integration of global markets. Three main pillars of the agreement.

  • Domestic Support: Calls for a reduction in domestic subsidies that distort free trade and fair price. As per this Aggregate Measurement of Support(AMS) is to be reduced by 20% over a period of 6yrs for developed countries and 13% over a period of 10yrs for developing countries.
  • Subsidies are put in Green, Amber, and Blue box subsidies.
    • Green box subsidies are those which do not distort trade and shouldn't involve price support. These are allowed without limits. Ex: PM Kisan for the farmers by the government.
    • Amber box subsidies are all government measures that are considered to distort trade and production. Subsidies that are directly related to production quantities. Ex: MSP.
    • Blue box subsidies are “amber box subsidies with conditions”, designed to reduce distortion. 
  • Market access: It ensures that tariffs are fixed by individual countries to allow free trade and also to remove non-tariff barriers and converting them into tariff duties.
  • Export Subsidy: To phase out export subsidies by all the countries as agreed under the Nairobi package of WTO


Other Issues of Farm Subsidies
  • As per Economic Survey-2018, rich farmers are benefitted over small farmers from the farm subsidies.
  • Out of Rs. 1.70 lakh crore in budget 2018-19 as food subsidy only about Rs 3000-4000 crore was the investment in agriculture shows the wasteful expenditure rather than supporting agriculture.
  • Subsidies lead to a huge financial deficit and burden on the financial exchequer.
  • A culture of subsidies may promote inefficiency and dependence on the government and also reduce the incentive to improve.
  • Policies of subsidies may also promote other countries to follow the same pursuit which may then lead to trade wars and protectionist policies.

Issues at the international level due to subsidies

  • Developing countries like India and China are not in an affordable position to breach the de minimus levels of AMS(Aggregate Measures of Support) where developed countries like the USA provides subsidies >50% in some products like cotton, sugar.
  • Subsidies in developed countries also act as barrier entries to the goods of developing countries.
  • Subsidies granted to developed countries are way higher than those provided in developing countries like India.
  • Loopholes in Agreement of Agriculture signed under WTO as it doesn't talk about equity. For developing countries, spending on price support measures and input subsidies taken together cannot exceed 10% of the total value of agricultural production and for developed countries, it is only 5% of their value of agricultural production. This provision is misused by the USA to provide 200% of subsidy to wool compared to other products.
  • Kelker committee recommended the phased elimination of subsidies and convert them to capital investments.
  • Rationalizing subsidies by stopping those subsidies which are not giving the desired results.
  • Exports need for long term policies on export trade to ensure continuity and keep farmers aligned to exports 
  • Actively promoting financial inclusion in rural areas.
  • Constructing cold chain facilities, warehouses near the farm gate.
  • Holistically developing the agri-sector by strengthening backwards and forward linkages.
  • Subsidies should come with a sunset clause.
  • Promoting initiatives like contract farming and cooperative farming to make agriculture remunerative.
  • The farm bills a right move to empower the farmers and reducing the monopoly of APMC markets should be implemented strictly.
  • The government should equally focus on both food and nutritional security.
  • Building a market intelligence system to put price and demand forecasts which help farmers in better price realization and also helps farmers in deciding the crop.
  • International measures:
    • Developed and developing countries have agreed to phase out export subsidies under the Nairobi package of WTO.
    • India and China jointly submitted a proposal to WTO to reduce high agricultural subsidies to rich countries.
    • Rather than the limit on entire agricultural value production the subsidies should be limit based on an individual product like cotton, wool, etc.
    • The base year to calculate the de-minimus level should be changed as per the request of developing countries.

The agriculture sector which provides >40% of employment, contributes only 16-17% of GDP which shows the problems and issues the farmers are facing. Hence farm subsidies with an intention to improve the agriculture sector help to achieve the government's aim of doubling the farmer's income by 2022 and also helps India to achieve double-digit growth by ensuring food security.

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